Personal life

Born in London, England, Ricardo was the third of 17 children of a Sephardic Jewish family of Portuguese origin who had recently relocated from the Dutch Republic.[4] His father, Abraham Ricardo, was a successful stockbroker.[4] He began working with his father at the age of 14. At age 21, Ricardo eloped with a Quaker, Priscilla Anne Wilkinson, and, against his father's wishes, converted to the Unitarian faith.[5] This religious difference resulted in estrangement from his family, and he was led to adopt a position of independence.[6] His father disowned him and his mother apparently never spoke to him again.[7]

Following this estrangement he went into business for himself with the support of Lubbocks and Forster, an eminent banking house. He made the bulk of his fortune as a result of speculation on the outcome of the Battle of Waterloo. The Sunday Times reported in Ricardo's obituary, published on 14 September 1823, that during the Battle of Waterloo Ricardo "netted upwards of a million sterling", a huge sum at the time. He immediately retired, his position on the floor no longer tenable, and subsequently purchased Gatcombe Park, an estate in Gloucestershire, now owned by Princess Anne, the Princess Royal and retired to the country. He was appointed High Sheriff of Gloucestershire for 1818-19.[8]

In August 1818 he bought Lord Portarlington's seat in Parliament for £4,000, as part of the terms of a loan of £25,000. His record in Parliament was that of an earnest reformer. He held the seat until his death five years later.

Parliamentary record

He voted with opposition in support of the liberal movements in Naples, 21 Feb., and Sicily, 21 June, and for inquiry into the administration of justice in Tobago, 6 June. He divided for repeal of the Blasphemous and Seditious Libels Act, 8 May, inquiry into the Peterloo massacre, 16 May, and abolition of the death penalty for forgery, 25 May, 4 June 1821.

He adamantly supported the implementation of free trade. He voted against renewal of the sugar duties, 9 Feb., and objected to the higher duty on East as opposed to West Indian produce, 4 May 1821. He opposed the timber duties. He voted silently for parliamentary reform, 25 Apr., 3 June, and spoke in its favour at the Westminster anniversary reform dinner, 23 May 1822. He again voted for criminal law reform, 4 June.

His friend John Louis Mallett commented: " ... he meets you upon every subject that he has studied with a mind made up, and opinions in the nature of mathematical truths. He spoke of parliamentary reform and ballot as a man who would bring such things about, and destroy the existing system tomorrow, if it were in his power, and without the slightest doubt on the result ... It is this very quality of the man's mind, his entire disregard of experience and practice, which makes me doubtful of his opinions on political economy."

Death and legacy

Ten years after retiring and four years after entering Parliament Ricardo died from an infection of the middle ear that spread into the brain and induced septicaemia. He was 51.

Ricardo is buried in an ornate grave in the churchyard of Saint Nicholas in Hardenhuish, now a suburb of Chippenham, Wiltshire.[10] At the time of his death his fortune was estimated at about £600,000.

He was also an abolitionist, speaking at a meeting of the Court of the East India Company in March 1823, where he said he regarded slavery as a stain on the character of the nation.[12] His sister, Hanna, had married David Samuda (1776-1824) who came from a slave-owning family with a substantial number of slaves in Jamaica.[13]

Value theory

The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.

Mr. Malthus appears to think that it is a part of my doctrine, that the cost and value of a thing be the same;--it is, if he means by cost, "cost of production" including profit.

Rent

Ricardo contributed to the development of theories of rent, wages, and profits. He defined rent as "the difference between the produce obtained by the employment of two equal quantities of capital and labor." Ricardo believed that the process of economic development, which increased land utilization and eventually led to the cultivation of poorer land, principally benefited landowners. According to Ricardo, such premium over "real social value" that is reaped due to ownership constitutes value to an individual but is at best[16] a paper monetary return to "society". The portion of such purely individual benefit that accrues to scarce resources Ricardo labels "rent".

Ricardo's theories of wages and profits

In his Theory of Profit, Ricardo stated that as real wages increase, real profits decrease because the revenue from the sale of manufactured goods is split between profits and wages. He said in his Essay on Profits, "Profits depend on high or low wages, wages on the price of necessaries, and the price of necessaries chiefly on the price of food."

Comparative advantage

Between 1500 and 1750 most economists advocated Mercantilism which promoted the idea of international trade for the purpose of earning bullion by running a trade surplus with other countries. Ricardo challenged the idea that the purpose of trade was merely to accumulate gold or silver. With "comparative advantage" Ricardo argued in favour of industry specialisation and free trade. He suggested that industry specialization combined with free international trade always produces positive results. This theory expanded on the concept of absolute advantage.

Ricardo suggested that there is mutual national benefit from trade even if one country is more competitive in every area than its trading counterpart and that a nation should concentrate resources only in industries where it has a comparative advantage,[17] that is in those industries in which it has the greatest competitive edge. Ricardo suggested that national industries which were, in fact, profitable and internationally competitive should be jettisoned in favour of the most competitive industries, the assumption being that subsequent economic growth would more than offset any economic dislocation which would result from closing profitable and competitive national industries.

Ricardo attempted to prove theoretically that international trade is always beneficial.[18]Paul Samuelson called the numbers used in Ricardo's example dealing with trade between England and Portugal the "four magic numbers".[19] "In spite of the fact that the Portuguese could produce both cloth and wine with less amount of labor, Ricardo suggested that both countries would benefit from trade with each other".

Criticism

As Joan Robinson pointed out, following the opening of free trade with England, Portugal endured centuries of economic underdevelopment: "the imposition of free trade on Portugal killed off a promising textile industry and left her with a slow-growing export market for wine, while for England, exports of cotton cloth led to accumulation, mechanisation and the whole spiralling growth of the industrial revolution". Robinson argued that Ricardo's example required that economies were in static equilibrium positions with full employment and that there could not be a trade deficit or a trade surplus. These conditions, she wrote, were not relevant to the real world. She also argued that Ricardo's math did not take into account that some countries may be at different levels of development and that this raised the prospect of 'unequal exchange' which might hamper a country's development, as we saw in the case of Portugal.[20]

Protectionism

Like Adam Smith, Ricardo was an opponent of protectionism for national economies, especially for agriculture. He believed that the British "Corn Laws"--tariffs on agricultural products--ensured that less-productive domestic land would be harvested and rents would be driven up (Case & Fair 1999, pp. 812, 813). Thus, profits would be directed toward landlords and away from the emerging industrial capitalists. Ricardo believed landlords tended to squander their wealth on luxuries, rather than invest. He believed the Corn Laws were leading to the stagnation of the British economy.[21] In 1846, his nephew John Lewis Ricardo, MP for Stoke-upon-Trent, advocated free trade and the repeal of the Corn Laws.

Criticism of the Ricardian theory of trade

Ricardo himself was the first to recognize that comparative advantage is a domain-specific theory, meaning that it only applies when certain conditions are met. Ricardo noted that the theory only applies in situations where capital is immobile. Regarding his famous example, he wrote:

it would undoubtedly be advantageous to the capitalists [and consumers] of England... [that] the wine and cloth should both be made in Portugal [and that] the capital and labour of England employed in making cloth should be removed to Portugal for that purpose.[23]

Ricardo recognized that applying his theory in situations where capital was mobile would result in offshoring, and therefore economic decline and job loss. To correct for this, he argued that (i) most men of property [will be] satisfied with a low rate of profits in their own country, rather than seek[ing] a more advantageous employment for their wealth in foreign nations, and (ii) that capital was functionally immobile.[23]

Ricardo's argument in favour of free trade has also been attacked by those who believe trade restriction can be necessary for the economic development of a nation. Utsa Patnaik claims that Ricardian theory of international trade contains a logical fallacy. Ricardo assumed that in both countries two goods are producible and actually are produced, but developed and underdeveloped countries often trade those goods which are not producible in their own country. In these cases, one cannot define which country has comparative advantage.[24]

Critics also argue that Ricardo's theory of comparative advantage is flawed in that it assumes production is continuous and absolute. In the real world, events outside the realm of human control (e.g. natural disasters) can disrupt production. In this case, specialisation could cripple a country that depends on imports from foreign, naturally disrupted countries. For example, if an industrially based country trades its manufactured goods with an agrarian country in exchange for agricultural products, a natural disaster in the agricultural country (e.g. drought) may cause an industrially based country to starve.

The development economist Ha-Joon Chang challenges the argument that free trade benefits every country:

Ricardo's theory is absolutely right--within its narrow confines. His theory correctly says that, accepting their current levels of technology as given, it is better for countries to specialize in things that they are relatively better at. One cannot argue with that. His theory fails when a country wants to acquire more advanced technologies--that is, when it wants to develop its economy. It takes time and experience to absorb new technologies, so technologically backward producers need a period of protection from international competition during this period of learning. Such protection is costly, because the country is giving up the chance to import better and cheaper products. However, it is a price that has to be paid if it wants to develop advanced industries. Ricardo's theory is, thus seen, for those who accept the status quo but not for those who want to change it.[25]

Ricardian equivalence

Another idea associated with Ricardo is Ricardian equivalence, an argument suggesting that in some circumstances a government's choice of how to pay for its spending (i.e., whether to use tax revenue or issue debt and run a deficit) might have no effect on the economy. This is due to the fact the public saves its excess money to pay for expected future tax increases that will be used to pay off the debt. Ricardo notes that the proposition is theoretically implied in the presence of intertemporal optimisation by rational tax-payers: but that since tax-payers do not act so rationally, the proposition fails to be true in practice. Thus, while the proposition bears his name, he does not seem to have believed it. Economist Robert Barro is responsible for its modern prominence.

Influence and intellectual legacy

David Ricardo's ideas had a tremendous influence on later developments in economics. US economists rank Ricardo as the second most influential economic thinker, behind Adam Smith, prior to the twentieth century.[26]

Ricardo became the theoretical father of classical political economy. However, Schumpeter coined an expression Ricardian vice, which indicates that rigorous logic does not provide a good economic theory.[27] This criticism applies also to most neoclassical theories, which make heavy use of mathematics, but are, according to him, theoretically unsound, because the conclusion being drawn does not logically follow from the theories used to defend it.[]

Ricardian socialists

Ricardo's writings fascinated a number of early socialists in the 1820s, who thought his value theory had radical implications. They argued that, in view of labor theory of value, labor produces the entire product, and the profits capitalists get are a result of exploitations of workers.[28] These include Thomas Hodgskin, William Thompson, John Francis Bray, and Percy Ravenstone.

Georgists

Georgists believe that rent, in the sense that Ricardo used, belongs to the community as a whole. Henry George was greatly influenced by Ricardo, and often cited him, including in his most famous work, Progress and Poverty from 1879. In the preface to the fourth edition, he wrote: "What I have done in this book, if I have correctly solved the great problem I have sought to investigate, is, to unite the truth perceived by the school of Smith and Ricardo to the truth perceived by the school of Proudhon and Lasalle; to show that laissez faire (in its full true meaning) opens the way to a realization of the noble dreams of socialism; to identify social law with moral law, and to disprove ideas which in the minds of many cloud grand and elevating perceptions."[29]

Neo-Ricardians

After the rise of the 'neoclassical' school, Ricardo's influence declined temporarily. It was Piero Sraffa, the editor of the Collected Works of David Ricardo[30] and the author of seminal Production of Commodities by Means of Commodities,[31] who resurrected Ricardo as the originator of another strand of economics thought, which was effaced with the arrival of the neoclassical school. The new interpretation of Ricardo and Sraffa's criticism against the marginal theory of value gave rise to a new school, now named neo-Ricardian or Sraffian school. Major contributors to this school includes Luigi Pasinetti (1930-), Pierangelo Garegnani (1930-2011), Ian Steedman (1941-), Geoffrey Harcourt (1931-), Heinz Kurz (1946-), Neri Salvadori (1951-), Pier Paolo Saviotti (-) among others. See also Neo-Ricardianism. The Neo-Ricardian school is sometimes seen to be a component of Post-Keynesian economics.

Neo-Ricardian trade theory

Inspired by Piero Sraffa, a new strand of trade theory emerged and was named neo-Ricardian trade theory. The main contributors include Ian Steedman and Stanley Metcalfe. They have criticised neoclassical international trade theory, namely the Heckscher-Ohlin model on the basis that the notion of capital as primary factor has no method of measuring it before the determination of profit rate (thus trapped in a logical vicious circle).[32][33] This was a second round of the Cambridge capital controversy, this time in the field of international trade.[34] Depoortère and Ravix judge that neo-Ricardian contribution failed without giving effective impact on neoclassical trade theory, because it could not offer "a genuine alternative approach from a classical point of view."[35]

Evolutionary growth theory

Several distinctive groups have sprung out of the neo-Ricardian school. One is the evolutionary growth theory, developed notably by Luigi Pasinetti, J.S. Metcalfe, Pier Paolo Saviotti, and Koen Frenken and others.[36][37]

Pasinetti[38][39] argued that the demand for any commodity came to stagnate and frequently decline, demand saturation occurs. Introduction of new commodities (goods and services) is necessary to avoid economic stagnation.

Contemporary theories

Ricardo's idea was even expanded to the case of continuum of goods by Dornbusch, Fischer, and Samuelson[40] This formulation is employed for example by Matsuyama[41] and others.

Ricardian trade theory ordinarily assumes that the labour is the unique input. This is a deficiency as intermediate goods are a great part of international trade. The situation changed after the appearance of Yoshinori Shiozawa's work of 2007.[42] He has succeeded to incorporate traded input goods in his model.

Yeats found that 30% of world trade in manufacturing is intermediate inputs.[43] Bardhan and Jafee found that intermediate inputs occupy 37 to 38% in the imports to the US for the years from 1992 to 1997, whereas the percentage of intrafirm trade grew from 43% in 1992 to 52% in 1997.[44]

^Ricardo, David. 1919. Principles of Political Economy and Taxation. G. Bell, p. lix: "by reason of a religious difference with his father, to adopt a position of independence at a time when he should have been undergoing that academic training"

^ abRicardo, David (1821). On the Principles of Political Economy and Taxation. John Murray. p. 7.19.

^Patnaik, Uta (2005). "Ricardo's Fallacy/ Mutual Benefit from Trade Based on Comparative Costs and Specialization?". In Jomo, K. S. The Pioneers of Development Economics: Great Economists on Development. London and New York: Zed books. pp. 31-41. ISBN81-85229-99-6.

^Yeats, A. (2001). "Just How Big is Global Production Sharing?". In Arndt, S.; Kierzkowski, H. Fragmentation: New Production Patterns in the World Economy. Oxford: Oxford University Press. ISBN0-19-924331-X.

^Palma, G (1978), "Dependency: A formal theory of underdevelopment or a methodology for the analysis of concrete situations of underdevelopment?", World Development, 6 (7-8): 881-924, doi:10.1016/0305-750X(78)90051-7